Concepts in contract common law

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Contracts

I. The Basics: Offer, Acceptance, Consideration, Various Types of Contracts

There are three authorities for contract law, the Common Law, U.C.C., and the Restatement of Contracts, which is usually the opposite of the Common Law.

Offer -- it must create a reasonable expectation in the offeree that the offeror is willing to enter into a contract on the basis of the offered terms. Need not be explicit. Also, one must be aware of the offer, even in a unilateral contract situation, to claim recompense for “accepting” the offer. (rewards to general public, etc.)

Lapse -- can terminate offer (think snow melting)

Acceptance -- power of acceptance terminated when 1) offeror takes definite action inconsistent with the intent to enter into proposed contract, and 2) the offeree acquires reliable information as to this.

Death -- of offeror terminates a revocable offer prior to acceptance, while an offeree’s death does not terminate the power of acceptance, if the personal representative can accept.

Common law “meeting of minds” -- mutual assent to the same bargain at the same time. Community standards/business practices usually not applicable.

Advertising -- “First come First served” clause will be construed as a legally binding offer to sell.

Consideration -- A promise to perform is valid consideration since one is under no legal obligation to do that Majority view is that detriment to promisee is the exclusive test of consideration. Also found to exist in midterm modifications when the obligations of both parties are varied. Consideration is also defined as a “bargained for exchange” of a benefit to the promisor or a detriment to the promisee.

“Moral Obligation” -- from Restatement of Contracts, a promise made in recognition of a benefit previously received by the promisor from promisee is binding to the extent to prevent injustice.

Illusory promises -- violate requirement of mutuality. Sometimes the right to cancel or withdraw at any time amounts to an illusory promise. When this right is restricted in some way, however, its not. However, courts will imply a “best efforts to sell” promise in an agreement otherwise lacking consideration (e.g. a distributorship). This implied promise becomes valid consideration and saves the contract.

Preexisting duty rule -- does not apply when the duty is owed to a 3d party in the agreement. (e.g. you have to follow through on a promise to pay a baseball player to hit a home run for you even if he’s already under a preexisting duty to hit home runs for his own team -- a 3d party)

Midterm modifications -- in common law, must be supported by consideration; a varying of duties of both parties will suffice. Not necessarily in writing unless the original contract calls for it.

General Offers to public -- Strictly unilateral contracts. In a reward situation, therefore claimant must have been motivated by the offer to claim.

Bilateral Contracts -- promise for promise. Unilateral -- promise for performance, acceptance thereof is by performance only.

Offer for Unilateral Contract -- acceptance is NOT by return promise, or communication of return promise, it is by performance. Part performance will render an offer irrevocable, but not preparation for performance (buying of parts, etc).

Mailbox Rule Exception -- a rejection mailed followed by mailing of acceptance; whatever the offeror receives first is controlling.

Option contracts -- offertory power to revoke the option is limited. Mailbox rule does NOT apply in option contract cases. A counteroffer during the option period does not terminate the option. However, if the optionor (one holding the option) detrimentally relies on a putative rejection, the optionee (buyers) power to accept t he offer terminates when the optionor relies on the rejection (when he sells to someone else). Even a token consideration of $1 valid.

Divisible Contract -- 1) if performance divided into two or more parts under the contract, 2) the number or parts due from each party is the same, 3) performance of each part by one party is the agreed upon equivalent of the corresponding part from the other party. Partial payments when the contract is not divisible are merely progress payments.

Employment Contracts -- are always held to be divisible contracts.

Installment Contract -- Missed partial payments are only a partial breach, unless there is an acceleration clause. Differs from a divisible contract in that it might state that each delivery a separate contract or its equivalent, but it only, in reality, is a delivery of goods under separate lots to be separately accepted, but it is still just one contract legally. (like shipping month supply of a good)

Aleatory Contract -- Like Fire insurance. Duties of performance independent, each party may sue the other for breach even if he himself is in default.

Bilateral Executory Accord -- agreement that the existing claim shall be discharged in the future by rendition of a substituted performance.

II. Condition, Promise, and Contractual Duties and Interpretation

Ambiguities -- be careful about these. Courts will struggle to find a contract even if something is ambiguous as a practical matter (e.g. “stuff in my house” is a sufficient description)

Implied Conditions -- courts will give legal effect to “reasonable expectations of the parties” in a contract.

“Constructive Condition Precedent” -- if no stated order as the performance, and one performance takes time while one can be done in an instant (like payment), then the courts interpret the former as a “constructive condition precedent” to the latter.

Condition -- An event, other than the passage of time, the occurrence or non-occurrence of which will create, limit, or extinguish the other party’s absolute duty to perform.

“Constructive Conditions” -- In a bilateral contract for the agreed exchange of performances, even though performances are absolute, the law regards them as constructive conditions to avoid potential unjust results.

Waiver of Condition -- gratuitous promises to waive a condition are usually unenforceable, but if the promisee can show detrimental reliance on the promise, revocation estopped. All waivers must be known and voluntary.

Condition to pay “upon profit” -- the promisor’s duty is NOT discharged because he never made a profit. The courts construe this as the promisor’s own fault.

Promise -- An unconditional promise is an absolute commitment to do or refrain from doing something. Breaching a promise in a non-material manner does not excuse the non-breachers duty to perform his promise.

Trade Usage -- may, even in common law, give particular meaning to an agreement, may supplement it or qualify it. 1) if both parties knew of the trade usage, and 2) neither party knew or had reason to know that the meaning attached by the other party was inconsistent with it.

III. Discharges of Duty, Defenses as to Formation and Duties

Impossibility -- If the non-occurrence of an event was a basic assumption of the parties, and neither party assumed risk of loss, the duties under the contract are discharged. Must be impossible to perform by anyone, physically/objectively impossible. However, if one party had partially performed before the impossibility, he is entitled to quasi-contract or reasonable value to restore the status quo ante. Furthermore, if the impossibility rendered performance impossible even for a short time, the entire contract may be discharged.

Supervening Illegality -- where the performance of the contract has become illegal by change in the law after the time of the contract, the promisors duty is excused by impossibility unless he 1) assumed the risk or 2) his own conduct has contributed to the new legal prohibition.

Illegality -- generally the court will “leave the parties as it found them,” except in cases of pari delicto (one party significantly less guilty than the other), or when one party is entirely innocent.

Infancy -- the power of avoidance lies solely with the minor/incompetent person, not with the other party.

Mutual Mistake -- contract voidable by the adversely affected party if 1) the mistake relates to a basic assumption of the contract, 2) the mistake has a material effect on the exchange, 3) the mistake must not be one where the adversely affected party bore the risk.

Anticipatory Repudiation -- DOES NOT apply to 1) unilateral contracts, or 2) bilateral contracts where non-repudiating party has already fully performed.

Bankruptcy -- of promissee does NOT of itself constitute grounds for promisor to discharge the contract.

Release -- usually in writing and supported by new consideration. Discharges contractual duties.

Bilateral Mistake -- contract can be reformed in equity to reflect original intent of both parties.

Statute of Limitations -- Where a past obligation would be enforceable except for a technical bar (like statute of limitations) a new promise in writing will be enforceable on its own terms, even in the absence of consideration.

Bankruptcy -- express promise to pay a debt formerly discharged in bankruptcy is binding without consideration.

Bounty -- theory used in reward cases by a government agency under which the actor can collect the reward even if ignorant of offer.

Material/Immaterial Breach -- material if the aggrieved party did not get the substantial benefit of the bargain or receives a defective performance, or when the partial failure of performance defeats the whole purpose of the contract. Also, negligence and hardship on the breaching party is considered.

Breach after part performance -- it is necessary to determine the materiality of the breach. If material, it discharges the non-breacher’s duty.

Breach -- also when one party knowingly prevents, hinders, or otherwise makes more costly the other’s performance.

Parol Evidence Rule -- when the parties express the intent that the writing is an integration, all other oral or written evidence prior to the contract or oral utterances contemporaneous to the signing of the contract are inadmissible to vary the contract.

Acceptable use of Parol Evidence -- Note that the Parol Rule does not include utterances after the contract. Also, evidence prior/concurrent with the contract are acceptable as explanation/elaboration/addition. This rule does NOT apply to cases in reformation, misrepresentation, condition precedent, formation defects, condition subsequent, interpretation (outside of plain meaning), and true consideration. It can also be used to show there was no true contract at all (condition precedent not met).

Merger/Integration clause -- states the agreement is complete on its face, and that the writing embodies the entire agreement. Therefore, outside (prior/contemporary oral) evidence cannot be used to vary the contract terms.

Memorialization -- “memorializing” an oral valid agreement is not necessary, even if the oral agreement stipulated that the memorialization will occur before performance.

Unliquidated Debts -- (debt where amount in bona fide dispute) a payment of lesser sum discharges the entire debt.

Accord & Satisfaction -- in regard to debts, the amount of debt must be the subject of a bona fide dispute and consideration given, unless the payment is in a new type of goods altogether, or the debtor writes “paid in full” after a bona fide dispute and the other party deposits it.

Statute of Frauds -- Exceptions: 1) the “main purpose exception” Oral loan guarantees are acceptable if the guarantor is directly benefiting economically/personally; however, an employee orally guaranteeing loan for company or a father for son might not be applicable. 2) an oral contract for sale of goods enforceable as to the goods received and accepted by the buyer. 3) an oral contract for goods is enforceable as to specially manufactured goods not suitable for sale in the sellers ordinary course of business, or when the seller has begun to substantially perform before repudiation. 4) note the “partial performance” exception to the Statute of Frauds applies to goods and realty ONLY.

Statue of Frauds -- A contract made under the Statute of Frauds must be modified under the Statue of Frauds.

Statue of Frauds -- MY LEGS (marriage, year one, land, executor, guarantor of debts of another, sale of goods $500 or more). Applies to contracts not performable by their own terms within one year (a 3 year lease but not open ended life insurance)

Statute of Frauds in land sales -- Essential terms must be in writing, like price of land, names of parties, and description of land reasonably sufficient to identify land. No need for overly legal or precise descriptions.

Specific Performance -- Not applicable to personal services, but available in land contracts to both buyer and seller. Must have an adequate description of the property.

Promissory Estoppel -- 1) promisor should reasonably expect to induce an action/forbearance, 2) of a definite and substantial character, 3) such action/forbearance is induced. Promise enforceable only to the extent necessary to avoid injustice.

Medical Issues -- generally a doctor is not held liable for the failure of an operation. However, when he makes repeated promises for success that induce reliance, then the physician will be held responsible for the success.

IV. Assignments, Third Parties

Assignments -- no writing necessary except in certain assignments. No consideration necessary, but revocable if gratuitous. Assignments supported by consideration are irrevocable. Clauses prohibiting assignments are generally construed to prohibit only the delegation of duties, not the assignment of benefits. Assignment of rights barred under common law if it will change obligor’s duty. Once obligor has notice of an assignment, he is legally bound to render performance to the assignee. Payment of debts to the assignor does NOT discharge the obligor’s duty.

Gratuitous Assignment -- is irrevocable if assignment is 1) in writing, 2) signed or under seal, and 3) delivered by assignor to assignee.

Assignor-Assignee Relations -- the obligor and assignee are in privity; privity extinguished between assignor and obligor. However, in a breach, both the assignor and assignee will be held liable. Both assignor and assignee are entitled to the same defenses in actions brought by the obligor, as also the assignee is subject to any defenses the obligor has against the assignor.

Assignment of rights not in existence -- if expected to arise from a contract or business relation then in existence, it is enforceable, if not, then not enforceable (like assigning future royalties before your book gets accepted for publication)

Non-assignment clauses -- assignor liable for breach of condition, but the assignment still valid.

Sub-assignee -- has no rights against the original assignor. Must sue the sub-assignor.

Delegation -- Both the delegator/obligor are liable in a breach as well. The delegator will be the surety and the delegatee the principal. (A delegates duty to pay to B, in breach A will still be liable as a surety) “Unique” duties cannot generally be delegated. Painting a portrait unique, but painting a barn probably not.

Third Party Beneficiaries -- Rights can be terminated at any time prior to vesting. Vesting occurs when 1) 3d party manifests assent in a manner determined by the principals, 2) 3d party brings suit to assert his rights under the contract, 3) 3d party materially changes his position in reliance on the promise.

Incidental Beneficiaries -- This group of folks has NO rights. Arise when there is NO 1) express designation as a 3d party in the contract, 2) NO indication that performance is to be made to a 3d party, 3) NO language designating 3d party rights under the contract.

Donee Beneficiaries -- has no rights to sue the promisor except in cases of estoppel (if promisor should foreesee reliance on the promise)

V. Damages

Liquidated Damages -- are acceptable if 1) damages are difficult to ascertain at time the contract is formalized, and 2) the amount agreed upon is a reasonable forecast of compensatory damages in case of a breach. If non-punitive and no other “loss of bargain” remedy exists, then is valid.

Covenant not to compete -- sometimes void in “restraint of trade.”

Penalty and Forfeiture clause -- sum in excess of the value of the contract and fixed to be paid upon breach.

Lost volume sellers -- the normal difference between expectation minus actual profits does not apply in cases of a “lost volume seller,” where the seller will sell one item instead of the two he anticipated. 1) demand is limited, 2) supply is unlimited from manuf. In this case, damages are contract price minus cost to seller.

Quantum Meruit -- plaintiff performed services but cannot recover on the contract because contract not fully performed before something happened or the contract was unenforceable.

Quasi-Contract -- only available as a remedy in a case of total breach with unjust enrichment.

VI. Construction Law

Substantial Performance -- used mostly in construction cases. (argentine wood ok in place of brazilian wood). The paying party can receive legal damages to compensate for a less-than-perfect performance.

Construction Contracts -- Damages:

Owner Breach -- Before construction: Profits on contract to builder During: Profits plus costs After: Contract price plus interest

Builder Breach -- Before: Cost of Completion plus delay costs During: Cost of Completion plus delay costs After: (such as late performance) Costs of Loss of use, but if that is not easily determined, then interest on the value of the building as a capital investment.

Subcontractor Bidding -- offers can be deemed irrevocable for a reasonable time under promissory estoppel (binding as an option contract) without consideration if 1) offeror reasonably expected it to induce action/forbearance by offeree before acceptance and such 2) action is induced.

Subcontractor Bidding -- also, there is no acceptance by general contractor until such acceptance is communicated to the offeror. There is no rule that the lowest bid always be used either.

Risk of loss -- lies with builder, for technically he can build another structure. No partial recovery.

Architect’s certificate of completion -- if the architects refusal to provide this is in bad faith, then the court will excuse the condition. Builder will collect under substantial performance.